Local Government and Regeneration Committee

Meeting date: Wednesday, January 18, 2012

Official Report 467KB pdf

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Living Wage Inquiry

Agenda item 2 is an oral evidence session on our inquiry into the living wage in Scotland. The evidence session was scheduled following correspondence from the Confederation of British Industry Scotland in December, which expressed concerns in relation to the adoption of the living wage policy by Scottish local government. For the record, we invited the CBI to attend but, unfortunately, it declined the invitation. However, we have a panel of witnesses who represent the business community. I welcome Colin Borland, who is the head of external affairs with the Federation of Small Businesses in Scotland, and Amy Dalrymple, who is the policy and research manager with the Scottish Chambers of Commerce. I thank them for coming to this slightly earlier than usual meeting. Does either of you want to make an opening statement?

We sent in a written submission just last week. I presume that all committee members have had the chance to read it. It covers our main points.

I am happy to move straight to questions.

Okay. I will kick off by asking you to go over any major concerns that you would have and complications that you envisage, particularly in relation to procurement, if local government were to introduce a living wage.

As our evidence says, we agree with the local authorities that have said in evidence that they should be left to determine their pay policies for their staff. We should not get involved in that.

On procurement, we want to debate and clear up several issues so that we have a better idea of exactly what impact the proposal would have. For example, to whom would the living wage apply? Would it apply to all staff in a company that contracts with a local authority and would that mean all Scottish staff or all United Kingdom staff? Would it apply to apprentices, interns and so on? Would it apply only to the staff who were engaged on the particular contract? If so, what would we do about central support staff and others who might spend only a bit of time working on the contract?

Once we get an idea of to whom the policy would apply and exactly how it would work, we would need to consider the subcontracting chain. Would only primary contractors be subject to the policy, or would it also apply to companies to which work was subsequently subcontracted? If so, how far down that chain would we go? Would we include only subcontractors within the local authority area, or would it be within Scotland or the UK or perhaps globally? In essence, that is our thinking on the subject at present.

Colin Borland outlined the practical complexities in attempting to implement a living wage policy in public procurement. There is also a principle at stake. I agree with Colin Borland that we have no problem with any local authority, public sector organisation, voluntary organisation or business whose policy is to pay its staff the living wage. That is a separate point. However, a scheme or set of regulations that would force businesses to do that would be counterproductive, especially in today’s economic circumstances.

As Colin Borland outlined, such an approach would potentially force the rest of the company and other companies to uprate their wages as well. In that situation, businesses would have to take a decision based on one contract that they might decide to go for, rather than look at the issue as part of whole-business planning. That would not be good for a lot of businesses in Scotland that rely on public sector contracts for much of their business but have other contracts as well. It would mean taking the public sector procurement process and forcing it to drive businesses’ planning, which would mean that they would become either entirely reliant on the public sector—which we do not want if we want a healthy market—or unable to take up the opportunity of public sector contracts, which would place them at a disadvantage.

Businesses need to take that business decision, but the idea would not help the business environment in Scotland. It would not help businesses to create jobs, to develop or to do their job, which is to pull us out of the economic doldrums that we are in.

I am interested in what you have said, and would be interested to hear your comments on one thing that you did not touch on. Most people agree that, broadly speaking, the living wage is a good idea; it is just a matter of how, when, how much and so on. You did not mention competition from outwith the UK. Although we cannot do it contractually, I would like all procurement to favour local businesses—I want to encourage Scottish companies. Will you comment on the difficulties, with reference to the living wage, in dealing with European competitors to whom contracts have to be offered as well?

I welcome Bill Walker’s comments about favouring local businesses. We have been working hard with the Scottish Government on local economic benefit clauses in procurement to see what we can do through guidelines and culture to ensure that local businesses are favoured. I thank you very much for your support on that.

An issue is already being reported among our member businesses, particularly but not only in construction, about competition from other European member states, and from Ireland in particular. The economic circumstances mean that Irish businesses can undercut the prices that our businesses in Scotland have to charge. On top of all the issues that I have mentioned, the living wage is yet another issue that would undermine the competitiveness and development potential of Scottish companies.

The issue comes up in my area of Fife. We have what are loosely called foreign contractors operating in Fife, and they seem to be able to undercut local businesses. I know that, to its credit, Fife Council organises courses and so on to help companies to make the best bids. Of course, the council cannot favour local companies, but it can offer assistance. Is your approach that, if a living wage were to be introduced, it should be introduced across all European Union countries so that there is a level playing field?

I think that you are talking about introducing a living wage as a condition of procurement, so it would apply to every company that was tendering for that contract, whether they were from Scotland, Ireland, France or anywhere, or even from outwith the European Union. The control would lie with the contracting authority.

It would introduce even more complexity when foreign companies were bidding for contracts of the sort that Colin Borland described, in terms of monitoring the supply chain and other such things. If a living wage was going to be introduced as a condition, you would need to think about enforcement, which would become very complex in a single EU market context.

It is obviously a key duty of local authorities to look after local economic development, and we understand that that involves making some pretty difficult decisions. It is not always easy to make those long-term procurement decisions.

I am slightly less worried about EU competition as such, and more worried about indigenous small businesses losing out to multinationals wherever they might be sited. In our written evidence, we raise the point that it is a lot easier to cross-subsidise in a large company; I could say that I was paying people whatever amount you want me to pay and could fund that from activities elsewhere in the organisation. A small locally based business cannot do that.

There is also an issue if I have access to international supply chains beyond the EU, because in order to meet a minimum wage condition I could buy products not from a local producer, but from a producer in the far east, or wherever, who is completely outwith the scope of any EU jurisdiction. What is the long-term effect of that on the local economy?

I want to turn something on its head. Colin Borland said that if a living wage was introduced, it would force others to uprate, which would not help to create jobs. I come at it from a different angle: if it forces others to uprate, that will give people more spending power, which means that your members—and the economy as a whole—may benefit. I would like some comment on that.

I have found that a lot of smaller local businesses pay their staff better rates than some of the multinationals. Rather than a living wage being detrimental to smaller businesses, I argue that it could benefit smaller businesses and allow them to compete with multinationals. I would like to hear comment on that, too.

There is absolutely no doubt that, whichever study we look at, small businesses come out as being among the best employers. We do not collect comprehensive data from our members on exactly what they pay, but from the available statistics I can tell you that about a quarter reported that the 15p increase in the national minimum wage on 1 October had a negative impact on their business. We also know that around 27 per cent do some sort of local government work. I do not know what the correlation is between those two elements, but if we assume that there is at least some crossover, a living wage would put a bit of pressure on any business that has to find the money to pay for it.

Kevin Stewart is right: I, too, want more money in the local economy, which has to be a good thing. The difficulty is deciding on the best way to achieve that. Is it best done by increasing people’s hourly rate, or by having more people in the workforce as a whole?

I note that there is research from—I believe—the Low Pay Commission that said that when the national minimum wage is increased, it is not as simple as the employers saying, “The national minimum wage has gone up so we will lay off members of staff.” The effect is slightly more subtle than that; employers tend to find more efficient ways of working or of increasing productivity. One way of doing that is to say to employees that they can do the same job in fewer hours so that the employer improves efficiency. Therefore, an unintended consequence of the uprating of the minimum wage is that although the hourly rate could be increased, the people that you are trying to help through the living wage policy would not take home any more money at the end of the week.

09:45

To increase what is in pay packets and create an economic stimulus could well lead to employers taking on more people.

Yes it could—if the economic stimulus were to happen. However, there will be a wider economic impact if we are not taking on more people, or if the only way I can win a contract is to say that I will not use a local supplier but will go elsewhere and use cut-price imported goods.

We are in favour of having more money in local economies and giving people spending power. Frankly, there is not enough money at the moment to do everything that we want to do.

The point that Colin Borland was trying to make earlier is that you would not be increasing people’s total pay. If the hourly rate goes up, causing the employer to cut someone’s hours, the amount of the money that they get at the end of the week or month will not increase, so no more money will go into the economy.

Recently, I have been looking at a couple of construction businesses and car dealerships as examples. They are working within very tight margins and if they were to increase wages for any or all their staff—as would probably need to be the case in order to guard against equal pay claims—they would have to look at other ways of reducing their spending, such as reducing people’s hours. Companies will not see their entire wages bill increased. It is important to remember that.

A lot of companies, including some bigger ones, even working in partnership with the trade unions, have made a responsible response to the economic downturn. They have made wage agreements with their staff that, depending on the companies’ circumstances, include wage cuts, wage freezes and cuts in hours in order that they can respond to the economic and business problems that they are facing. The living-wage measure would undermine their efforts to come through the current economic situation as a team and to maintain jobs and employment.

Many of the procurement contracts that would be affected are based on hours, particularly in the social care and janitorial sectors, in which many local authorities are now contracting out. It would therefore be impossible in some cases for employers to reduce employees’ hours, because the procurement itself would be based on an amount of hours.

That is right for those specific contracts. However, I interpreted your original question as being about whether, if an employer has to raise wages as a result of introducing the living wage for public sector contracts, they would have to raise wages across the board, and whether that would be for the broader social good.

If we are talking specifically about contracts that councils let, the living wage will be reflected in the price of the job and will not be an issue if that contract is all that the company and its staff do. My point is that most of our members who do such work do many other things as well, so to introduce the living wage would have an impact elsewhere in their business. They could be left having either to focus solely on public sector work—which is not particularly good as a business model—or to withdraw from it altogether, thereby leaving the field clear for large multinationals.

I thank you for your written submissions, which are helpful in giving us a rounded picture of the effects of the living wage. Just to get these things on the record, I ask you to set out the differential between the minimum wage and the living wage and what that would mean for business. Will you also say why it is important that business has the flexibility to set its own wages, given the other overheads that it has and the drive to maintain employment in the short term, and to increase it if possible? If you could answer those two questions, that would give us a picture of where small to medium-sized businesses are struggling against big companies that do not necessarily supply local jobs, which small to medium-sized businesses have more chance of doing.

As, I think, we say in our written evidence, the differential is about 20 per cent. If we assume the current over-21 national minimum wage of £6.08 an hour and a 37.5-hour working week, the differential is about 20 per cent. We do not collect data on exactly how much our members pay people—we do not have that information available. We are also not sure to whom the instant proposal that is on the table at the moment would apply and in what circumstances; therefore, it is difficult for us to establish a figure. However, let us suppose that businesses are looking at a 15 to 20 per cent increase in their wage bill, although it would be unusual for all their employees to be at that level.

One of the biggest threats to cashflow at the moment—this comes through consistently from our member surveys—is rising overheads, whether it is the cost of utilities, finance costs or whatever. At the same time, footfall is down and we are doing less business, so we are paying more to do less, and that is squeezing margins. We would have to deal with anything that added to that—we always do—but it would be incredibly difficult.

Cutting jobs is the last thing that small businesses, in particular, do because it takes a long time to get somebody trained up, whom we then know all about. However, in our regular monitoring of how things are going, we are beginning to see signs that businesses are now thinking about—or actually are—laying people off rather than trying to work a bit smarter. Things are finely balanced at the moment.

Do you see the flexibility to be able to pay a viable wage as essential to maintaining jobs in the first instance?

It is crucial at the moment. Unemployment has risen quite sharply. The Scottish Chambers of Commerce quarterly business survey comes out today. I hope that you have all seen an embargoed copy of it—you were all sent a copy, anyway. If you have read it, you will know that it paints a pretty bleak picture of confidence for 2012 across the sectors that we survey, which include tourism, construction and retail. They are looking at a 2012 that is going to be even more difficult than the previous year.

Our members are responsible businesses, which is one reason why they joined the Scottish Chambers of Commerce. They recognise their role in the community and the role that business has in the community, which is one of the functions of the Scottish Chambers of Commerce. They do not want to go around laying their staff off, but if a decision is taken externally about what they must pay their staff and they are unable to look at their business plans in the round and decide what is viable, they will be forced to make decisions about their staffing levels because of that external pressure on their staffing costs.

Businesses need flexibility in order to maintain employment and we in the policy community, the business support community and the political community should be doing our best to enable them to do that. We should be enabling them to give people jobs rather than making them worry about whether they need to restrict jobs because of external wage pressures.

Given that the private sector is key to economic growth and stimulus, can you put in perspective the evidence that we have heard—to which Kevin Stewart has referred, to an extent—that, by increasing the living wage, we would increase the spend and, therefore, stimulate the local economy?

However, is the other side of the coin not that, if small to medium-sized businesses that create employment start to lay off people, there will be fewer people to spend money and buy things? In other words, there cannot be a public sector unless there is a private sector to support it, and we need to find some balance where the living wage is able to boost the local economy through spending.

I think that the balance is to be struck in regard to whether there are only a few fewer people spending a bit more money, or more people spending a wee bit less money. The fact is that there is not a lot of money around at the moment; neither the private nor the public sector has the extra £2 a head for everyone who is on the minimum wage. Indeed, the same applies to the voluntary sector; our voluntary sector members are important in public procurement, but there is simply no spare cash around to give them that kind of money. Given the need to prioritise our social goods, we would argue that, at the moment, the priority social good should be to give as many people as possible jobs.

As I am not an economist, I will leave any definitive opinion on how that model might work out for academics. However, from our recent history, particularly in my part of the world—the west of Scotland—I know what happens when you narrow the economic base after an economic downturn. We become more reliant on a smaller number of large employers, which leaves us more vulnerable to the next wave of economic difficulties. If we learn anything from the current situation, it must be that we need to broaden and strengthen the economic base in order to ensure that we are—if not completely immune to them—better able to respond to international pressures.

I do not think that anyone wants a narrowing of the economic base or overreliance on one particular sector.

Before the minimum wage legislation was introduced, it was claimed that it would lead to many job losses, particularly in the small to medium-sized business sector. I have seen no evidence that that happened. Has the panel?

That legislation was before my time, but I do not think that that was our contention then and it is certainly not our contention now. There is no such evidence; in fact, the evidence shows that during what Mervyn King dubbed “the NICE decade”—NICE being non-inflationary, consistently expansionary—small businesses in Scotland created two jobs for every job that big business shed. The FSB supports the national minimum wage and the work of the Low Pay Commission. The minimum wage itself sets a floor below which unscrupulous employers can undercut our members. Of course, we might well argue about what the level should be, but that is the Low Pay Commission’s job, and we and others continue to make representations to it. It remains to be seen whether a model that served us very well during a period of constant expansion will continue to operate so well, but I have no cause for concern at the moment.

The key point is that it would be a national minimum wage and would therefore apply to all employers and would affect everyone. I echo Colin Borland’s expression of support for it. We want regulation, because to an extent it is important in protecting employees, business and good employers. After all, chambers of commerce members are responsible employers. As far as I understand it, the living wage proposals that are on the table would affect only certain employers and would therefore undermine necessary business competition.

Witnesses from London told the committee that one way in which the living wage had been taken forward in the city was through contractors being asked to make two versions of their bids: first, their best bid, and secondly a bid that took the living wage into account. If we had a local economic benefit mechanism, a local authority could look at bids and say, “Well, that one’s slightly dearer, but its economic benefit will allow us to pay the living wage”. Would such a compromise mean that not everyone would have to take the living wage into account in their bids but the council would still be able to consider such matters in awarding contracts? The approach seems to work in London; would it work in Scotland?

10:00

Obviously there would be administrative costs in preparing two bids and modelling all that work. Moreover, as I suggested earlier, it all depends on to whom in the workforce the measure would apply. Will I have to cost it across my group of companies, which is a different matter from costing it across the half-dozen people who will be involved in a certain job? How will I do that if I have certain shared back-office functions? I might have an office junior or someone who handles invoices for particular contracts. It could be modelled, but we need to know more about what is on the table before we can give a definitive answer.

Knowing the detail is key to knowing how much of an impact the measure will have on businesses. As we made clear in response to Bill Walker, we are really keen on local economic benefit; if councils are taking that into account, that is great. However, they need to consider broader local economic benefit; they cannot simply look at the wages of the staff who are employed on a particular contract, the staff in the company involved or however it pans out—which, to get all Donald Rumsfeld on you, we have established that we do not know. One would have to take into account in the parameters whether a company could afford to take on the contract if it paid the living wage or whether more local companies could give more local jobs to people if the contract were awarded with wages being lower than the minimum wage. I do not think that simply looking at staff wages provides a broad enough picture of local economic benefit and whether it would have the impact on the economy that we all want. Instead, we need to take a broader view and think about what will create more local jobs.

In the second paragraph of the third page of its submission, the FSB refers to “Worsening business confidence” and says:

“There is a continuous downward trend from March 2011 of FSB members predicting an increase in business revenue/sales”.

Do you not mean a decrease?

I am sorry—yes. We predict a decrease in turnover and sales over the coming three months and, as we say in the submission, that trend has been fairly consistent for a number of quarters, and possibly for a year.

If the living wage were adopted and made compulsory, would there be a knock-on effect on the affordability of service provision?

In what sense do you mean that?

If the cost of services goes up, will it have to be passed on?

Yes. Any pound that comes from one place will have to be paid for from another.

That, I suppose, could have ramifications for the electorate.

It might, particularly if I have to pass on costs to customers who are not being subsidised by the taxpayer. For example, I will have to recover the costs of a pure business-to-business transaction from elsewhere and, if I have to do that across a group of businesses, it might have more than one knock-on effect. Again, though, I am happy to leave that debate to those who are more educated than me, particularly the economists.

As members have no more questions, I thank the witnesses for their evidence.

10:04 Meeting suspended.

10:05 On resuming—